There is no right answer to this question as every SME (small and medium enterprise) is unique and needs something else when it comes to IT vendor. Never think otherwise, you are unique. There are however few factors to consider when evaluating potential IT vendor. I can only describe it from our own experience dealing with SMEs in Singapore – why sometimes we were a good match and sometimes not. 

The final decision about IT vendor usually comes from SME business owner or management. That is why the first thing that you as SME must do right is to make sure that business owner and management are present in negotiations and presentations from the beginning. How can you as business owner possibly decide who to choose if you have never met IT vendors yourself ?

Do not ever judge us (IT vendors) by submitted proposals only – we can be very cunning in that. There are many IT vendors who can write glamorous proposals and at the end deliver very little and who would go about suing them ? To make your investment worth, you will have to be personally involved in the project itself if you like it or not, so you must like people you will be working with. You will be meeting them very often for few coming months – go and check how much you like them, not just based on knowledge or presentation they can prepare but how you like them as people. The root of all problems that we ever experienced in our 10 years of automating SME businesses was always human relationship problem. People start getting aggressive not because problem is too big and can't be solved to the satisfaction of all parties involved. It's because they don't like the person they are supposed to resolve the problem with and they are not willing to even talk to each other. IT industry or not, its always about people and how well they can work together.

That brings me to the second most important factor, make sure that all the people (at least main future users of the system) like your IT vendor of choice as well to eliminate resistance of change and willingness to cooperate. Yup, your IT vendor representatives have to be nice people and lovable. That is why you should insist to meet not just sales person who comes, makes presentation and then you won't see him again. You should meet lead developer, project manager and all important people on the team that you will have to deal with. If you like them, the process will be much more enjoyable and positive results of your efforts and resources have higher chances of success. 

After that, you can be more practical and evaluate all other more obvious factors like: 

Did you check clients references?  The third most important step is to take list of your IT vendor's clients and make sure you call at least few of them to check how was their experience with IT vendor. You do not need to speak to the owner, it is perfectly OK to speak to people who participated in the development process and had a chance to get to know the IT vendor. DO NOT SKIP THIS STEP, PLEASE. 

Is your IT vendor flexible enough? or would you have problems amending your requirements in the process ? From our experience, 99% of the initial requirements in custom software development usually change, at least a bit but they do change. Only as you see your new system grow, you realize what you really want. Don't ever sign any fixed requirements document that would bind you, it's not necessary anymore. IT systems were defined that way in the past. Nowadays, with agile software development approach, you can both stay flexible and still protect yourself. 

Will you have access to the source code of your system? Make sure that if you spent lots of money and time developing customized software application based on your know-how that it will at the end belong to you. Do not allow your IT vendor to lock you up by not giving you access to the “heart” of your application. May it happen that you stop liking your IT vendor, you always want to have a source code to make sure, somebody else can take over or that somebody else can handle maintenance of your system. If you do not, you  may end up paying for updates and upgrades unnecessarily for a long time even when the relationship turns sour. 

Who likes user licenses ? As SME you sure do not like them as that means lots of extra spending on the system every single year. Currently, there are companies who can develop customized software application for you at one time software development cost and then annual maintenance cost, no user licenses. They might not be big or branded but they do a quality job and you save lots of your resources. 

Are there any hidden costs? Always make sure you know about all costs involved in the customized software application development. Sometimes its convenient not to mention them at first and then shock clients who have no choice anymore but to pay. Check one time software development cost (preferably go by project cost as opposed to man-hours, its impossible to know if you are paying reasonable amount of money for man-hours), check maintenance fees, hosting fees, licensing fees, additional new functionality fees (if charged extra per hour?), training cost, any other software or hardware cost ? How will maintenance cost change in the subsequent years? Do you need to upgrade your computers to be able to run the system or buy server or update Internet connection ? That would be additional cost to your IT project you need to consider. Do you have to pay in advance or after the job is delivered ? Generally, its OK to pay up to 30% of the total project cost in advance if cost is above 10k, for smaller projects other arrangements are OK. Annual maintenance cost should not be more than 20% of the one time software development cost. Does maintenance cost cover any extra man-hours of changes in the system or will you have to pay extra? Is cost quoted with or without GST ?

How is project timeline going to be managed ? Are there any fines or other penalties if you do not provide feedback to your IT vendor within defined period of time? With customized software applications, timeline is a headache to both parties. Everybody must do its part – IT must vendor deliver on time, client must provide feedback on time, not to drag project too much. Make sure that timeline is split into milestones and deliverables so you know what to expect and when and how to schedule your staff's testing periods. Check what project management tools will IT vendor use to make sure its easy and convenient to follow the timetable. Ask to be provided regular progress reports to make sure you are on the track.

How will conflicts be resolved, if any ? You should discuss this with your IT vendor upfront, ask for their advice and experience in this area. Also, during project itself, make sure you keep all communication properly documented for reference, may any legal or other conflict occur. Make sure you read all terms and conditions that your IT vendor puts into the contract. 

Anything else to consider ? It would be great if your IT vendor can provide you with warranty period after implementation to start running live smoothly – IT vendor should be available during this time to quickly and for free fix any problems that might still happen, assist you in further training if necessary, etc. Can your IT vendor help you with application for IT grant(s) available? It would be a plus if they had an experience with that or could recommend someone reliable. Don't try to do it yourself, it's usually very time consuming. However, always check if you are eligible for any grant, you can save lots of money. Do you have a direct mobile number to the project manager in charge ? It's the easiest way to get things done fast when you need it most.